Watchmaking on the verge of a slowdown

At the recent awards ceremony for the first Swiss federal diplomas for Watch Sales Assistants, Nicolas Hayek, Chairman of the Swatch Group and promoter of the event, was most confident as to the immediate future of both his company, and the sector: ‘All business sectors go through economic cycles. Now, for the moment Swiss watchmaking remains on an upward cycle that is going to continue throughout this year, even if the financial sector and the United States are showing signs of weakness through the mistakes made that we all know about’, he explained. ‘We haven’t made the same errors and we are showing no signs of weakness. What’s more, the United States – the largest market for Swiss exports – is not in recession, not to mention the fact that Europe has replaced the US as the leading global economy, and the Middle East and Asia are going to continue buying our high-quality timepieces. Moreover, January and February have been sensational months for sales, even with the unfavourable exchange rate. For the Swatch group, the negative effect of the changes amounts to around 20 million CHF per month. On a monthly turnover to the figure of 650 million, this is perfectly absorbable. In a word, profits will be up this year’.

Optimism still the word of the moment

This optimism is largely shared by Jean-Daniel Pasche, President of the Federation of the Swiss Watch Industry (FH). He states that the turbulence recently experienced by financial markets, and which is currently costing the US economy a certain amount of growth, have no direct impact on the watchmaking sector, especially as dependency on the American market is considerably reduced in favour of geographical regions with an intact growth potential. This year, Hong Kong is forecast to replace Uncle Sam as the foremost destination for Swiss horological products.

This shows the importance that China now has – with Hong Kong as a gateway – particularly because of import duties. ‘Based on the statistics from the beginning of this year, marked by export growth in January of 23%, and even 40% for timepieces costing more than CHF 3,000 ex-works price, there is every reason to believe that the first half of 2008 will be perfectly in line with what we saw last year’, he explains. ‘Nonetheless, we do expect slightly weaker growth for the second part of the year’.

Slowdown confirmed

Buoyed up by an impressive start to 2008, is Swiss watchmaking ready to repeat last year’s feat – export growth of 16.3% – for the first time in nearly 20 years? Nothing could be less certain. According to financial analysts, even if the first six months of the year continue the trend of 2007, they agree with Jean-Daniel Pasche’s analysis with regard to the expected slowdown in the second semester. ‘The four years of double-figured growth that Swiss watchmaking has just experienced represent exceptional development’, explains Patrik Schwendimann, financial analyst with the Zurich Cantonal Bank. ‘I don’t think it’s possible to maintain that kind of growth rate in the long term. Historically, the branch developed on an annual growth basis of 6 – 7%, and I see no reason for that to change. So for this year, I expect to see a slowdown that should position the sector closer to the values I’ve just given’.

The reasons for the slowdown? For Patrick Schwendimann, the current temporary weakening in the United States and that is forecast for Europe, not to mention Japan, are inevitably going to impact on watch sales – a decrease that Asia alone will not be able to compensate. This also applies to the major groups on the stock market that cannot extract themselves from these crosswinds, sustained by unfavourable exchange rates. ‘Personally, I’m counting on growth of around 4% – 5% over the year’, explains Alex Nigliorini, analyst with securities broker Helvea. ‘What the industry has experienced these last few years is simply not tenable over the long term, so we’re going to see growth in this activity sector return to normal’. Is this something to celebrate when at the same time Watch Houses are increasing their production capacities at top speed? All agree that the increase of stocks in the distribution networks is probably even worse than the current bottlenecks watchmakers are experiencing with their supplies. However, there is no reason for Swiss watchmaking not to succeed at one of the United States’ most fervently wished-for scenarios: a soft landing…